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RRIF withdrawal changes – it’s about time

Finally, someone in Ottawa figured out that the combination of low interest rates and increased longevity threatens the financial well-being of many retirees.

It took long enough. Economists and seniors’ organization such as CARP have been warning for years about the danger of forcing Canadians to withdraw money from their retirement savings that many don’t need immediately. But successive governments ignored the entreaties to do something about the minimum withdrawal rules governing registered retirement income funds (or RRIFs).

Why? Because it would cost them money to make any changes. The withdrawal formula that was in place until this week was nothing more than a cash grab, introduced in the 1992 budget by a Progressive Conservative government that was desperate to find new sources of revenue to combat soaring deficits. One of the solutions devised by the finance minister of the day was to force seniors to withdraw their tax-sheltered retirement savings sooner, thereby generating more taxable income.

It was no minor adjustment. The minimum withdrawal at age 71 jumped from 5.26 per cent for RRIFs opened up until 1992 to 7.38 per cent for plans set up in 1993 or later. That formula has been in place ever since.

Of course, the world has changed dramatically since 1993. Back then, the average Canadian could expect to live 77.68 years. By 2012, the age was up to 81.24 years, and it is almost certainly higher today. In the meantime, interest rates on the type of low-risk securities that are best suited for RRIFs have fallen through the floor. According to the Bank of Canada, the average interest rate on a five-year GIC at the start of 1993 was about seven per cent. At that level, a 7.38 per cent minimum withdrawal didn’t seem unreasonable. Today, that same five-year GIC will earn you only 1.5 per cent at the major banks.

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It was clearly an untenable situation. Seniors were faced with the option of taking more risk with their RRIFs than was appropriate or watching their capital deplete at an alarming rate.

Finally, federal finance minister Joe Oliver has done something about it. In the proposed 2015 budget, he announced significant reductions in the amounts that people would be required to take out of their RRIFs each year. Effective immediately, a 71 year old will only need to withdraw 5.28 per cent of their plan’s value as of the first of the year. That percentage increases each year at a slightly faster rate than previously demanded. However, the minimum annual amount will always be less than it had been under previous rules, until it hits a maximum of 20 per cent at age 95.

The government says that the new rules will allow almost 50 per cent more capital to be preserved by age 90, assuming the minimum is withdrawn each year. That’s good news, as far as it goes. However, those GICs are still paying only 1.5 per cent and the new minimums are well above that.

My preference would have been for Ottawa to eliminate the minimum withdrawals entirely. After all, everything in an RRIF will eventually be taxed when the plan holder or the surviving spouse dies. The feds will get their share sooner or later — they always do.

However, that was a bridge too far for Oliver. According to the budget annexes, the new RRIF withdrawals will cost the government $670 million in foregone revenue over the next five years. Combined with the estimated $1.135 billion cost of the increased TFSA contribution limit, he obviously felt that he’d done enough.

So we’ll have to be content with these changes for now. Perhaps some future finance minister will finish the job and allow people to decide for themselves when to make use of the money they’ve saved over a lifetime.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. His website is www.BuildingWealth.ca .

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